Sunday, February 22, 2009

A Bad Analogy

So, consider for a moment, the New England Patriots. The Patriots are lead on the field by a gentleman named Brady. Mr. Brady is well paid, and Mr. Brady's team is highly successful. They've won a bunch of Superbowls, they've gone 16-0, they've set a bunch of records. Then one January, some crazy shit goes down. Some dude catches a pass off the back of his head (yeah, it happened), a crazy drive, the unthinkable. The Patriots, the undefeated team, loses the Superbowl. Fans panic and cancel their season ticket orders. No one wants to watch the team on TV anymore, so ad revenue plummets. The ownership is in trouble. They have to pay rent on a giant stadium, they have to pay players, coaches, staff and facility personnel, they have all the travel expenses of a season. Kraft finally throws his hands up and gets ready to shut the doors on the team.

But wait! Boston won't sit idly by and watch their Patriots fold. Of course, they won't go out and buy tickets to see a team that's no good either. So they do the next best thing. The city council gets together and decides to offer a schload of taxpayer money to the Patriots in order to keep them together. There are some caveats though: the team must now pay its starting quarterback the league minimum, and they aren't allowed to bring in free agents or first round draft picks. Anyone that they hire must be a native of New England.

Kraft, for want of a better option, accepts the proposal. Brady quits and gets a job working for the Jets. The Jets are okay financially, and haven't accepted any rules on compensation, which means that Brady can earn 10 to 20 times as much as the league minimum. The Patriots need a couple of players to replace injuries and retirees, and they fill those slots with the best graduates that Harvard and Boston College have to offer. The Jets meanwhile sign Brett Favre out of retirement and pick up some star players and Heisman candidates from USC and Miami.

New England struggles during the season. Their quarterback has never even played in a bowl game much less the NFL, and their new hires on offensive line are routinely attempting to block players who are 50-100 pounds heavier than they are. The Patriots set a new single season record for sacks allowed, and finish the season 1-15.

The Jets, meanwhile, capitalize on New England's weakness and take the division for the first time in a long time. Favre finds success throwing to the greatest young receivers that the nation produced in the last year, and New York finally gets to beat down on the northern rivals that had been winning more than their fair share during the Brady years.

All the Giants fans are quietly purchasing Jets season tickets and buying season packages from DirecTV. Ownership is thrilled, and announces that they'll finally be able to afford to move their stadium out of @$%!#% New Jersey. Meanwhile, the Patriots are 1-15 and even the die-hard fans who'd been watching this year are canceling tickets and subscriptions. Some Jets jerseys have been spotted in and around Boston. The die-hard fans have been grumbling about it, but not too loudly anymore. Kraft still has to pay for that big old stadium, and the transportation, and the staff, and the coaches, and the facility personnel. So he goes back to the city council...

So I'm sure there's a great reason why capping executive pay and limiting use of H1-B visas is different from capping Brady's pay (and the NFL *already* has a per-team spending cap) and limiting free agency. What is it?

At first blush, it seems like the US government is investing heavily in previously dominant but presently downtrodden firms. As a requirement for that investment, they're severely limiting the ability of those firms to keep and attract top talent. Why would you hamstring a company that you're investing in? Aren't you almost guaranteeing that the bad times will get worse? And if they get worse, what are you going to do? Spend more? You'll have to spend more, since you can't let them fail. If you were going to let them fail, you'd have done that in the first place, right? Right?

1) It is most big banks, specifically most investment banks. That there are more banks in trouble though suggests that good leadership should be in even higher demand (and therefore pricier), no? Even if we concede that current leadership has proven unworthy, can we conclude as well that congress will do a better job than new, well-compensated, properly incented management?

2) True, the stakes are higher, but that would be an argument against political posturing like H1-B and executive pay caps, no?

3) This is a powerful concern. The CEO is one of few individuals around whose decisions can move more dollars than a quarterback. If there aren't meaningful metrics for CEO performance, there damn well should be. Additionally, there definitely are metrics... are they all meaningless? The few that I can think of are definitely of limited value...